One can be a value or growth oriented investor. Long term results favour value investing. Dividend growth investing combines the two approaches by looking for stocks that are undervalued but which have high and sustainable growth rates. This essay by John Dorfman is worth reading from this perspective.
•Growth of yield is the single best piece of information an investor can have since it implies:
–A company is financially strong enough to raise its dividend.
–There are sufficient earnings to support a dividend increase.
–Management has a clear commitment to grow the company.
–Management is confident enough about future cash flows to share current prosperity with share holders.
•Rising dividends impact a stock’s total return. All things being equal, when the dividend increases over a period of time, the stock price increases proportionately. Moreover, a rising dividend creates additional appreciation based on the appeal to investors of expected future dividend growth.
•A simple rule of thumb: CURRENT YIELD + DIVIDEND GROWTH = EXPECTED AVERAGE ANNUALIZED TOTAL RETURN
•Analysis starts with quantitative and financial screens. Evaluated are:
•Cash Flow •High projected growth of dividend
•Low payout ratios •High dividend yield
•Balance sheet strength •Consistent dividend growth history
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